2001 (9) TMI 254 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of assessee's claim for investment allowance.
2. Compliance with conditions under section 32A(5)(b) and 32A(5)(c) of the Income Tax Act.
3. Utilization of investment allowance reserve for acquiring new plant and machinery.
4. Distribution of investment allowance reserve among partners.

Detailed Analysis:

1. Disallowance of Assessee's Claim for Investment Allowance:

The primary issue in these appeals is the disallowance of the assessee's claim for investment allowance for the assessment years 1979-80 and 1980-81. The original assessments allowed the investment allowance, but the CIT withdrew it under section 263. The Tribunal initially restored the issue to the Assessing Officer (AO) for reconsideration, who subsequently disallowed the claim, stating that the assessee violated conditions under section 32A(5) by distributing the investment allowance reserve among partners and not utilizing it for acquiring new plant and machinery.

2. Compliance with Conditions Under Section 32A(5)(b) and 32A(5)(c):

The provisions of section 32A(5)(b) and (c) are central to this case. The AO argued that the assessee did not comply with these conditions, as the investment allowance reserve was distributed as profit and not used for acquiring new plant and machinery. The Tribunal, however, emphasized that the purpose of the investment allowance is to encourage industrial growth and development. It held that the conditions under section 32A(5)(b) and (c) were met as the reserve was retained in the business and utilized for permissible business purposes.

3. Utilization of Investment Allowance Reserve for Acquiring New Plant and Machinery:

The AO contended that the cost of new plant and machinery was met from a loan raised from Rajasthan Financial Corporation (RFC) and not from the investment allowance reserve. The Tribunal disagreed, stating that the reserve amount was retained in the business, and the acquisition of new assets was effectively funded by the reserve, even if the immediate source was a loan. The Tribunal noted that the reserve does not need to be a cash reserve but should be retained for business purposes. The Tribunal concluded that the assessee complied with the requirement of utilizing the reserve for acquiring new assets.

4. Distribution of Investment Allowance Reserve Among Partners:

The AO's second objection was that the reserve was distributed among partners, violating section 32A(5)(c). The Tribunal referred to the case of Asstt. CIT v. Shree Shantinath Silk Mills, where it was held that once new plant and machinery are purchased, the reserve can be transferred to partners' capital accounts without resulting in withdrawal of the investment allowance. The Tribunal found that the reserve amount was retained in the business and not withdrawn by the partners, thus not constituting a distribution of profit. The Tribunal concluded that the mere transfer of the reserve amount to partners' capital accounts did not violate the conditions of section 32A(5)(c).

Conclusion:

The Tribunal held that the assessee met the conditions under section 32A(5)(b) and (c) for earning and retaining the investment allowance. It found no justification for the AO's action in withdrawing the investment allowance and reversed the CIT(A)'s order. The Tribunal directed the AO to grant the investment allowance to the assessee for both years under consideration.

In the result, the appeals of the assessee were allowed.